Use It or Lose It…Examining the Efficacy of the Spouse And Family Exclusion Trust or Spousal Lifetime Access Trust

On January 1, 2024, the Applicable Exclusion Amount (“AEA”) reached a record high amount of $13.61 million. The AEA is the amount that any person can pass to a non-spouse without incurring an estate tax. An individual can pass an unlimited amount to the U.S. citizen spouse without worry about incurring a gift or estate tax. In 2011, legislation set the “permanent” exclusion amount at $5 million, as adjusted for inflation. The Tax Cuts and Jobs Act of 2017 (“TCJA”) temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation. Provisions of the TCJA cause the doubled amount to sunset on December 31, 2025. Thus, on January 1, 2026, the exclusion will return to $5 million, and with inflation adjustment it’s expected to be around $7 million at that time. Any transfer exceeding the AEA will be taxed at a rate of 40% on the overage. Given the nearly $7 million difference between the current AEA and the reduced AEA in the future, individuals whose estates exceed $6.5 million need to think about how to take advantage of today’s AEA. Using the AEA now ensures that individuals get to utilize the higher amount before it sunsets.

Let’s look at a quick example. Assume that an unmarried client has $15 million. They could give away $13.61 million this year and retain $1.39 million. At the client’s death in 2026, they’d only owe tax on the $1.39 million in their estate. If the client were married, that client could use a Spouse And Family Exclusion (SAFE) Trust, (sometimes called a Spousal Lifetime Access Trust (SLAT)) to hold the gift. Such a trust is set up by one spouse for the benefit of the other spouse and their children. The SAFE Trust appeals to many married individuals because even though the donor spouse gifts assets to the SAFE Trust, because the gift benefits their spouse, the donor spouse has indirect access to the assets.

For persons with wealth that exceeds twice the AEA, it may make sense for each spouse to consider establishing a SAFE Trust for the benefit of the other. This allows each spouse to utilize their AEA while having direct access to the assets in the trust of which they are the named beneficiary and indirect access (through their spouse) to the assets of the trust for the benefit of their spouse. Of course, this structure carries some risk. The spouses need to ensure that sufficient differences exist between the two trusts to avoid the “reciprocal trust doctrine.” Under the reciprocal trust doctrine, if the trusts are mirror images of one another, or relatively mirror images, the IRS will recharacterize two trusts and treat the trusts as if each spouse created a trust for himself or herself which will cause inclusion of the assets in the trust in the donor/decedent spouse’s estate.

Let’s assume that Amy and Sheldon have $30 million, $15 million each, and wanted to take advantage of the temporarily increased AEA. Sheldon gifts $13.61 million to a trust for the benefit of Amy and their children. Likewise, Amy gifts $13.61 million into a trust for the benefit of Sheldon and their children. Each spouse now only has $1.39 million left in their respective estates. The attorney drafting the trusts needs to design them in a manner that avoids the reciprocal trust doctrine. Generally, that means creating as much difference between the trusts as possible. For example, one trust might name one of the spouses as Trustee, but the other trust might name a third party as Trustee. Perhaps the trusts have different standards for distribution of income and principal. One trust might give the spouse a 5 and 5 power and the other might give the spouse a limited power of appointment. The more differences that that the trusts have, the less likely that they run afoul of the reciprocal trust doctrine.

If the trusts have been structured properly, then neither estate will include the assets of the trust. Unfortunately, without estate tax inclusion, the assets in the trusts do not receive a step-up in basis at death. For this reason, it’s important to consider what assets to use for funding the SAFE Trust. Given that the estate tax rate exceeds the long-term capital gains tax rate, the benefit of removing the assets from the estate likely outweighs the potential for capital gains taxes in the future.

The SAFE Trust has certain risks. First, there’s the risk that one spouse fails to create a SAFE Trust for the other. There’s always the risk of the spouses divorcing. Finally, there’s the risk that one spouse dies prematurely thereby causing the surviving spouse to lose indirect access to assets in the SAFE Trust for the benefit of that decedent spouse. Everyone has unique circumstances, including different levels of risk tolerance, which means that the SAFE Trust is not a one-size-fits-all solution. Regardless, given the sunset of the doubled AEA on January 1, 2026, it’s a great time to open the discussion about ways to take advantage of the AEA before the sunset.

What You Need to Know about the Corporate Transparency Act

Congress enacted the Corporate Transparency Act (the “Act”) for Fiscal Year 2021 as part of the National Defense Authorization Act with an effective date of January 1, 2024, which this blog first reviewed herein The Not-So Transparent Corporate Transparency Act. The Act requires any “Reporting Company” to file “Beneficial Ownership Information” (“BOI”) reports with the Financial Crimes Enforcement Network (“FinCEN”) for its “Beneficial Owners” and if created after January 1, 2024, its “Company Applicants.” Failure to report the required information may result in civil penalties of up to $500/day until corrected or criminal penalties of 2 years imprisonment or a $10,000 fine.

The Act originally imposed a 30-day deadline to report for any entity created on or after January 1, 2024. Thankfully, FinCEN published proposed and final regulations on November 30, 2023, extending that deadline to 90 days after confirmation of creation of the entity. Reporting Companies in existence prior to January 1, 2024, have until January 1, 2025, to file their BOI report. Reporting Companies created on or after January 1, 2025, have 30 days to file their initial BOI report. Note that pending legislation may extend the deadline for companies in existence prior to January 1, 2024, to file their BOI an additional year, until January 1, 2026; however, unless and until passed, all Reporting Companies existing on December 31, 2023, should follow the January 1, 2025, deadline. FinCEN has published “Beneficial Ownership Information Reporting Frequently Asked Questions” and guidance on how to complete the report ( to help explain the Act and the reporting requirements.

The Act defines a Reporting Company as any entity formed by a filing with a secretary of state or any foreign entity that’s registered to do business in the United States by filing with a secretary of state. This intentionally broad definition means that most privately owned businesses such as any corporation, limited liability company, limited partnership, or limited liability limited partnership, along with any other entity formed by filing a document with a secretary of state, will be subject to the duty to report. General partnerships, sole proprietorships, and trusts do not file documents with a secretary of state upon creation and thus are exempt from reporting. The Act exempts twenty-three categories of organizations such as banks, credit unions, depositories, securities brokers and dealers, tax-exempt entities, and large operating companies, all of which are already highly regulated.

Every Reporting Company needs to report its legal name, any names under which it does business, a principal business address, the jurisdiction of formation, its taxpayer identification number, and its Beneficial Owners. The Act looks at two separate “tests” to determine Beneficial Owners: the substantial control test and the 25% ownership test. Beneficial Owners are individuals who own or control 25% or more of ownership interest or any non-owner that exercises substantial control over the company. While those categories seem clear, a deeper investigation reveals they aren’t.

The “substantial control test” means any individual exercising substantial control over the company fits the Act’s definition of Beneficial Owner and therefore the Reporting Company needs to report the individual as a Beneficial Owner. A President, CEO, CFO, COO, general counsel, or any other individual performing similar functions exercises substantial control. Additionally, under the Act, anyone with the authority to appoint or remove certain officers, a majority of directors, or similar group of the Reporting Company exercises substantial control. Finally, any individual with the authority to make loans, undertake debt, modify governing documents, or otherwise make or influence important decisions for the entity exercises substantial control. If the definition seems broad, it is and that’s intentional. If it’s unclear whether an individual’s duties meet substantial control, prudent advice dictates disclosing the individual as a Beneficial Owner to avoid any potential penalties.

The “ownership test” requires a Reporting Company to identify all individuals who own or control at least 25% of the ownership interests of the company. Ownership interests include equity, stock, voting rights, capital or profits interest, convertible instruments, options, non-binding privileges to buy or sell any of the foregoing, and any other instrument, contract, or mechanism used to establish ownership. The Act does not require family attribution although it does require attribution for direct and indirect interests of an individual.

The Act requires any Reporting Company to disclose the name, date of birth, street address, a unique identifying number from a passport, driver’s license, or another such document, and a copy of that document for each of its Beneficial Owners determined under both the substantial control test and the ownership test. Additionally, any Reporting Company created on or after January 1, 2024, needs to report the individual who filed the formation or registration document for the Reporting Company, called the Company Applicant, and if different, the individual “primarily responsible for directing or controlling such filing,” limited to two individuals. This requirement has numerous implications for attorneys; a partner may direct an associate or paralegal to make the filing, thus both individuals would meet the definition of Company Applicant. The Act permits individuals who anticipate being Company Applicants to register for a FinCEN number that such individuals will provide to the Reporting Company instead of their personal information.

Also the Act considers a trustee who can dispose of trust assets that include at least 25% of a Reporting Company as a Beneficial Owner of that Reporting Company. Similarly, the Act includes the sole income and principal beneficiary of a trust owning at least a 25% interest in a Reporting Company as a Beneficial Owner of such Reporting Company. Any beneficiary with the ability to withdraw substantially all of the assets of a trust containing at least 25% of an interest in a Reporting Company will also be a Beneficial Owner of such Reporting Company.

As this article demonstrates, the Act has some complex provisions that have broad applicability. This article provides only a brief synopsis of the most relevant provisions. All company owners need to familiarize themselves with the provisions of the Act as it will affect any person with a privately-owned business (S-Corp, LLC, C-Corp, etc.).